2. Best Ever Toys just paid its annual dividend of $1.78 per share. The required return is10.6 percent and the dividend growth rate is 1.43 percent. What is the expected value of this stock five years from now

Expected value of stock is $20.84

Explanation:

The dividend discount method (DDM) is used to calculate the stock value. The commonly used formula for the Gordon Growth version of the DDM which focused on dividends,

Price of Stock = D5 / (r - g)

where:

D5 = Dividends after five year from the now = D ( 1 + g )^5

r = Required rate of return

g = Growth rate of dividends

Price of Stock = D ( 1 + g )^5 / (r - g)

Price of Stock = $1.78 ( 1 + 1.43% )^5 / (10.6% - 1.43%)

Price of Stock = $1.91 / 9.17%

Price of Stock = $20.84

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